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3 considerations for participant investment advice

Whether you look at contribution rates, investment returns, retirement readiness or confidence surveys all data points to the same thing – participants want, and frankly need, help.  As you evaluate the options available here are 3 key points to consider.

1.  Services provided – Do the proposed services fall under ERISA’s interpretive bulletin 96-1 definition of education where participants will be given general investing information and tools?  Or do the services fall under the definition of advice where someone will sign on as a fiduciary for fund-specific recommendations or account management?   While education definitely has its place in the industry, I have often times seen plan sponsors confuse “education” with “advice”.  So make sure you have a complete understanding of the services being offered and what that means, not only from a participant perspective, but from a fiduciary perspective as well.

2.  How are the services being delivered – While many times employers think that employees need face-to-face services, there are a number of other options available.  Advice can be delivered via the internet, remotely through advisers OR in a face-to-face setting.  The decision of how services are being delivered can not only impact the utilization of the service, but also greatly impact the overall price as well. 

3.  Business Model – How are the services structured to provide a sound fiduciary platform for the plan?  A couple of key points to keep in mind here are compensation and potential prohibited transactions.            

- Compensation – Make sure that you understand all forms of compensation paid to the adviser.  Not just the amount you are directly paying for the service.  If, for example, the adviser is collecting revenue sharing from some of the investments in the plan, how can you be sure that the recommendations are unbiased?   The government has issued guidance on acceptable ways advisory services can be established such as by an Independent Third Party, under the SunAmerica Opinion or through the Pension Protection Act.

- Prohibited Transactions – A plan fiduciary is bound to make decisions solely in the best interests of plan participants and beneficiaries.  There are some grey areas out there to look out for – such as a fiduciary soliciting a rollover (in which their revenue is increased) or recommending the purchase of a financial product outside of the plan to a participant.  Make sure processes are in place so that no potential prohibited transactions will occur.

Above all as with any fiduciary decision, documentation is king.  Whether you hire an independent third party or purchase advice as a part of a bundled product, make sure that you have a well documented process.  Not only for the initial selection of the service, but also an on-going monitoring process in place that outlines why decisions were made.

Scott Swezy
Vice President, Smart401k


About Smart401k

Smart401k is a web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans.  Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at